dELiA*s Inc.

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dELiA*s Inc.

435 Hudson Street
New York, New York 10014
U.S.A.
(212) 807-9060
Fax: (212) 807-9060
Web site: http://www.delias.com

Public Company
Incorporated: 1993 as dELiA*s LLC
Employees: 1,700
Sales: $158.4 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: DLIA
NAIC: 45411 Electronic Shopping & Mail-Order Houses

dELiA*s Inc. sells apparel, accessories, athletic gear, footwear, and home furnishings through several direct-mail catalogs, web sites, and retail outlets. Its target market is the segment of population often known as Generation Y—young men and women aged ten to 24 in the late 1990s. The company’s flagship catalog operation, dELiA*s, offers trendy clothing, cosmetics, footwear, and accessories designed to appeal to girls and young women. Other catalogs offer apparel and accessories targeting teenage boys, teen-oriented home furnishings, clothing, and accessories for pre-teen girls, and soccer equipment and apparel. Under its subsidiary, iTurf Inc., dELiA*s also maintains a collection of web sites, which offer the same merchandise found in the various catalogs. The e-commerce sites are linked to an entertainment and community web site geared to teen girls, which is also owned and operated by iTurf. In addition to its catalog and e-commerce operations, dELiA*s owns more than 40 retail outlets under dELiA*s, TSI Soccer Corp., Screeem!, and Jean Country names.

dELiA*s Inception: Targeting an Underserved Market

dELiA*s was launched in September 1993 from the New York apartment of Stephan Kahn, a former Wall Street analyst with a string of degrees from Yale College, Oxford University, and Columbia Business School. Kahn hatched the idea with his former Yale roommate, Christopher Edgar, a doctoral student in comparative literature with previous experience as a journalist and securities analyst.

Kahn and Edgar became aware that the growing population of young Americans known as Generation Y was becoming a major segment of the consumer market. The partners’ research revealed that these offspring of the baby boom generation were spending billions of dollars annually, much of it on apparel. More significantly, very few apparel retailers were exclusively targeting this age group, despite its obvious buying power. Kahn and Edgar saw a ready-made niche with very little competition. Potential investors were less enthusiastic, however, and the pair’s petitions for seed money were rejected. Undeterred, Kahn laid out $100,000 of his own savings and obtained additional startup capital from family and friends.

After studying such popular teen magazines as Mademoiselle and Seventeen, Kahn and Edgar hired designers and fashion consultants to create an apparel catalog for Generation Y girls. The catalog, which they called dELiA*s, combined creative layouts and editorial content with the latest styles from more than 50 brand-name vendors and emerging designers. Offering more than the traditional mail-order catalog, dELiA*s was actually a “magalog”—a hybrid catalog and fashion magazine. The publication was first distributed in March 1994 through a network of on-campus college representatives, and in its first year earned $139,000 in sales. Orders were taken by in-house phone representatives—many of whom were college aged—who were specially trained to understand and communicate with teen and young adult customers. Order fulfillment was handled by an independent third-party contractor.

In early 1995, Kahn and Edgar changed dELiA*s method of catalog distribution to a direct mail approach. In addition to using rented mailing lists, the company placed ads for free catalogs in the back pages of popular teen magazines. The response was overwhelming. Within days, dELiA*s received thousands of calls, most of them from high schoolers. These young girls quickly became captivated by dELiA*s distinctive design and cutting-edge, urban-look fashions. Referrals and word of mouth produced more requests for catalogs, and the company’s mailing list bulked up rapidly. By the end of fiscal 1995, dELiA*s maintained a database of 290,000 house names—that is, customers who had either made purchases or requested a catalog. Sales increased to more than $5 million. In late 1996, with more than one million names in its database, catalog distribution in the United States and Japan, and sales at more than $30 million, Kahn and Edgar took dELiA*s public. The IPO raised approximately $20 million. Six months later, a secondary offering brought in another $20 million.

1997: Breaking into New Markets

With working capital generated from its public offerings, dELiA*s was ready to expand. It did so in 1997, in several different ways. In late autumn, the company opened its first dELiA*s retail outlet store in Reading, Pennsylvania, and signed leases for two additional outlets in New York State. Two months after opening the Pennsylvania outlet, dELiA*s made its first two acquisitions.

On December 10, the company acquired TSI Soccer Corporation, a privately held direct marketer of specialty soccer apparel and equipment. The North Carolina-based TSI operated 13 retail stores located in Georgia, Maryland, North Carolina, and Virginia, but the majority of its sales were made through a direct-mail catalog operation. Because the U.S. soccer market was primarily composed of Generation Y youth, TSI’s target market dovetailed perfectly with dELiA*s. The acquisition added one million names to dELiA*s existing house list, making it the largest database of teenage shoppers in the United States. It also provided dELiA*s with access to the other half of the Generation Y market: teen boys. “This gives us a big list of customers with proven boy buyers and new girl buyers, as well as a young, aggressive management team,” said dELiA*s CFO Evan Guillemin in a December 1997 interview with Women’s Wear Daily.

Just one week after completing the TSI acquisition, dELiA*s made another purchase. The company acquired gURL Interactive Inc. gURL Interactive was the owner of gURL.com, an entertainment web site for girls that featured magazine-style articles, interactive games, bulletin boards, and chat rooms. The popular gURL site, which had been developed by three female students in New York University’s Interactive Telecommunications Program, had a loyal following of young women just the right age for dELiA*s fashions. The company planned to use its newly acquired web site as the cornerstone for a whole teenage Web community.

In late 1997, dELiA*s also began offering a line of teen-oriented home furnishings through a new catalog called Contents. Contents, first mailed as a dELiA*s catalog insert, contained furniture accessories and bedding for bedrooms and dorm rooms, as well as decorating ideas and advice.

1998: Continued Growth

In early 1998, Kahn and Edgar began adding to their Web presence with the launch of a dELiA*s web site. The site, which had a prominent link on the gURL.com site, initially allowed visitors only to order catalogs and get a feel for the dELiA*s style. Within a few months, however, the site was equipped with e-commerce capabilities, so visitors could view and order merchandise online. Like the popular catalog, dELiA*s web site offered more than just shopping. With contests, games, advice columns, and “fashion horoscopes” sprinkled throughout, the site became a destination spot, an up-to-the-minute source of fashion advice and entertainment. The company also built up its gURL.com site to include several new features.

dELia*s continued to build its online community with the May 1998 launch of discountdomain.com, a subscription site that offered deeply discounted merchandise to members in exchange for a monthly fee. dELiA*s also took its home furnishings business to the Web with contentsonline.com, the electronic version of the Contents catalog. For operational purposes, all of the company’s Internet properties were rolled into a newly formed subsidiary—iTurf Inc. dELiA*s made good use of cross-promotion by advertising the iTurf sites in its print catalogs, thereby greatly increasing traffic to the sites.

A few months later, dELiA*s added another business to its retail stable with the purchase of two New York-based clothing store chains. The chains—Screeem! and Jean Country—consisted of 26 locations in New York and New Jersey. Both catered to young men and women, carrying the sort of trendy apparel favored by dELiA*s followers. The Screeem! stores were also known for their unique, high-energy shopping environment, which featured live deejays, fashion shows, and promotional appearances. Like the 1997 purchase of TSI Soccer, the acquisition of Screeem! and Jean Country furthered dELiA*s growth in two key ways. Because the stores’ product mix contained about 60 percent young men’s apparel, they strengthened the company’s base in the male market. The chains also gave dELiA*s further entry into the full-priced retail store business, an opportunity Kahn intended to fully leverage. In a June 1998 interview with Women’s Wear Daily, he remarked that he planned to expand the Screeem! chain at a 40 percent pace for the next three to five years.

In the fall of 1998, dELiA*s expanded its catalog operations by purchasing selected assets of Fulcrum Direct, Inc., a catalog company targeting pre-teens. The $4.75 million purchase included trademarks and customer lists for five catalogs, the largest existing database of pre-teen buyers and catalog requesters and the largest collection of catalogs geared to this age group. The company also launched a brand new catalog called Droog, which offered apparel and footwear for boys and young men. Droog, the male counterpart to dELiA*s, was the first catalog in the United States to specifically target Generation Y boys. A Droog web site was launched in tandem with the catalog, becoming another building block in dELiA*s Internet community.

Company Perspectives:

dELiA*s goal is to be the leading direct marketer of casual apparel accessories and other related products to girls and young women of Generation Y.

The company’s two years of aggressive expansion resulted in 1998 sales of $158.3 million and a profit of almost $80 million. The company boasted an impressive mailing database of almost 11 million names at the end of 1998—a 175 percent increase from 1997—and unsolicited catalog requests were pouring in at the rate of more than 100,000 per month. The Internet segment of dELiA*s business was thriving as well. “We are now registering well over 20 million monthly page views on our combined sites and have several hundred thousand participants in our gURL community site,” Kahn was quoted as saying in a December 2, 1998, Business Wire release.

1999: New Customers, New Stores, and an IPO

dELiA*s maintained a steadily rapid rate of growth as it entered 1999. It kicked off the year with a January re-launch of one of the catalogs purchased from Fulcrum Direct. The catalog, Storybook Heirlooms, targeted girls aged 4 to 11. It offered upscale special occasion clothing, as well as casual apparel and accessories. In March, the company launched a similar catalog—called dot dot dash—aimed at girls aged 7 to 11. Corresponding web sites for both Storybook Heirlooms and dot dot dash were created and linked to dELiA*s iTurf e-commerce hub. The addition of the two merchandise lines for younger girls, sometimes called “tweens,” gave the company a female customer base ranging in age from 4 to 24.

February 1999 marked the opening of the first full-price retail dELiA*s store. Located in a White Plains, New York, mall, the 3,000 square foot store offered apparel, accessories, gifts, and entertainment merchandise in a shopping environment that typified dELiA*s hip style. A second store followed in June, located in Wayne, New Jersey. The company also opened two more TSI Soccer stores and signed several new leases for both dELiA*s and TSI units.

In April 1999, dELiA*s took its Internet subsidiary, iTurf, public in an offering of 4.2 million shares, which represented approximately 28 percent of its value. iTurf consisted of two main segments: the gURL community network and a collection of e-commerce sites. The gURL community was essentially an expanded version of the gURL.com site Kahn and Edgar had purchased in 1997. It offered magazine-style articles and columns, chat rooms, and posting boards, as well as an e-mail service called gURLmail and a collection of gURLpages—more than 103,000 personal Web pages designed by users of the gURL network. iTurf’s e-commerce segment consisted of online versions of dELiA*s various catalogs. Both the gURL network sites and the e-commerce sites were linked together in the iTurf.com gateway site. The IPO generated enormous interest, and iTurf’s stock immediately skyrocketed, reaching a high of $66 per share within just a few days.

ITurf’s newsmaking did not end with its IPO. Near the middle of May, the company announced a two-year strategic marketing alliance with America Online, Inc., the world leader in interactive services, Web communities, and e-commerce services. The iTurf-AOL partnership gave iTurf properties prominent positions in various areas of the America Online Internet community. It was expected that iTurf’s presence on AOL, which served more than 17 million members, would greatly increase traffic to the iTurf sites. “This alliance will give iTurf the opportunity to reach the largest consumer audience in cyberspace,” Kahn said in a May 12, 1999, press release. He elaborated, “AOL is the leader in creating and managing online communities and providing online shopping opportunities, which positions us well as we look to offer six of our e-commerce sites to AOL’s members and Web-based users.”

In early June, iTurf forged another important relationship when it partnered with RocketCash Corporation, a shopping gateway web site that allowed parents to create an online spending account for their children. Parents using RocketCash established pre-set spending accounts for their children via credit card and approved their access to specific merchants’ sites. This gave teens the ability to make online purchases in a secure environment, without using a credit card or providing any personal information. Under the terms of the iTurf-RocketCash alliance, the two companies agreed to develop cross-promotional initiatives designed to drive traffic to one another’s sites.

Full Speed Ahead

As it prepared to enter a new century, dELiA*s had various projects scheduled. The company planned to add ten more dELiA*s retail stores by the end of 1999, located in major cities in the Northeast and Midwest. An additional seven to ten TSI Soccer stores were also scheduled for opening. In addition, the company planned to convert most of its Screeem! locations to dELiA*s stores, and close the remaining locations. The company’s iTurf subsidiary was likewise gearing up for new ventures. One of its major projects was a book for teen girls based on editorial content from the gURL.com site. The book, tentatively entitled Deal with It, was scheduled to be published by Scholastic in late 1999. dELiA*s also expected to begin publishing and marketing gURL-branded calendars for the year 2000.

It appeared that dELiA*s’ growth in the years to come would continue, based on an essential yet simple premise: to serve the Generation Y market in as many ways as possible. The company believed it had barely scratched the surface of the Generation Y market possibilities and was planning to pursue new product lines, such as books and music. Another key tenet of the company’s strategy was to follow its prized customers as they advanced through life. “As the Gen Y population grows, so will dELiA*s,” the 1998 annual report asserted. “We’ll track our customers from preadolescence to young adulthood, providing them with a wide array of products and services and developing new, innovative strategies that will increasingly define the way an entire generation communicates, interacts and shops.”